Investment Research General Market Conditions 21 January 2013
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1 Investment Research General Market Conditions 21 January 2013 Danske Daily Key news Republicans ready to extend the federal debt limit by three months. Slightly stronger JPY as Bank of Japan starts its two-day meeting where aggressive measures to weaken the yen further are expected. Markets Overnight On Friday House Republican leaders proposed to extend the federal debt limit by three months. The proposal is expected to go before the House this week. It includes the requirement that the House and the Senate formally pass the budget by mid-april but, importantly, it does not include specific spending cuts. Political commentators see this as a significant shift in the Republican strategy and it should further reduce uncertainty in financial markets even though it looks like yet another temporary fix. According to the Wall Street Journal the White House is encouraged that there are signs that Republicans may back off their insistence on holding the economy hostage. US stock markets closed mixed on Friday but the underlying sentiment was still positive after a strong weekly performance. Markets easily shrugged off a weaker-than-expected Michigan consumer confidence as a possible compromise on the US debt ceiling moved closer. Dow Jones ended up 0.39%, S&P500 gained 0.34% and Nasdaq fell a modest 4% as a disappointing earnings report from Intel weighed on tech stocks. On Friday the European fixed income market saw very high intraday volatility as markets are trying to figure out the impact of the upcoming LTRO repayments the first results will be published on Friday. During the week EONIA rates had been pushed higher but as ECB s Coeuré said on Friday that he does not expect the repayments to affect EONIA rates, the effect was a relatively strong move lower in euro rates, mitigating a part of the move higher in rates seen earlier in the week. The LTRO repayments will be the number one theme this week in the European fixed income market. For more on the market impact see Government Bond Weekly that we published on 17 January. US Treasury yields also ended the day lower but the discussion about the Fed s QE exit might continue the coming weeks. On Sunday Fed Richmond president Lacker said that the Fed should stop printing money as soon as possible. Note that Lacker is well known for his opposition to the current open ended easing. In the FX markets all eyes are on the two-day Bank of Japan (BoJ) meeting that started today. The yen has rebounded slightly overnight as Nikkei is in negative territory - from its lowest level since the summer of 2010 and USD/JPY is once again below 90. Overnight Hamda, economic adviser to Prime Minister Abe, said that if yen weakness goes too far, it should be stopped. Hamada has earlier said that USD/JPY at 100 is fine, whereas 110 could be problematic. Note that Hamada is viewed as a very strong advocate of easier monetary policy in Japan. As we write in Weekly Focus, 18 January, we firmly expect BoJ to deliver easing measures this week and we continue to see clear upside for EUR/JPY and USD/JPY. Market movers today: Bank of Japan starts two-day meeting Eurogroup meeting US bank holiday and presidential inauguration Market overview Note: * The itraxx Europe Index show the spread development for the most liquid investment grade CDS contracts in the euro credit market. **The itraxx Europe Crossover show the spread development of the most liquid non-investment grade CDS contracts in the euro credit market. Source: Bloomberg Chief Analyst Arne Lohmann Rasmussen arr@danskebank.dk 07:30 1 day +/-,% S&P500 (close) S&P500 fut (chng from close) Nikkei Hang Seng :00 07:30 +/-, bp US 2y gov US 10y gov itraxx Europe (IG) itraxx Xover (Non IG) /-, % EUR/USD USD/JPY EUR/CHF EUR/GBP EUR/SEK EUR/NOK USD Oil Brent, USD Gold, USD Important disclosures and certifications are contained from page 5 of this report.
2 Global Daily Focus today. US markets are closed today and there are no important data releases out of the euro area either. Hence focus will be on Obama s inauguration speech tonight and the Eurogroup meeting. Regarding the eurogroup meeting, for once there are no urgent topics to discuss, reflecting that the political risk within the eurozone has decreased. Jean- Claude Juncker s successor will be appointed and according to press reports the new Eurogroup leader will be the Dutch Minister of Finance, Jeroen Dijsselbloem. Beside this, focus is on the Banking Union proposals, which aim at more supervision and to prevent a banking crisis in the future. Also, Cyprus will get some attention due to the country s need of a rescue package but we expect no agreement to be reached and the negotiations are likely to continue until March. BoJ today starts its two-day monetary meeting. We expect BoJ to raise its inflation target from 1% to 2% and to expand its asset purchase programme further, see Bank of Japan preview: BoJ to succumb to political pressure and raise inflation target, 21 January. Fixed income markets. Very choppy trading session in EUR rate markets on Friday as speculation about the impact of the LTRO repayments continues to dominate. Rates spiked in the morning but declined in the afternoon following comments from ECB Board member Benoît Coeuré, who said that he does not expect LTRO repayments to affect the EONIA rate. Even though the ECB does not yet know how much will be repaid, his comments offer some valuable guidance of how big an amount the ECB expects to be repaid at first hand. It is probably not that likely that it will be in the high end of the numerous estimates that are flying around. Following the wash-out in the markets since the ECB meeting, the pricing of the EONIA and Euribor curves is probably more balanced and the positioning less stretched. The results of the first repayment auction will be published at noon on Friday. Otherwise a quiet start to the week and there are no bond auctions today. The main event for the FX markets this week will be the BoJ meeting that started today and will end tomorrow. We believe the BoJ will live up to market expectations and deliver a higher inflation target and yet another round of asset purchases. Hence, we forecast that EUR/JPY and USD/JPY will move yet another leg higher this week. In our FX Forecast Update, 15 January, we pencilled in a rise in EUR/JPY to 126 and in USD/JPY to 93 in H1 13. However, it should be noted that expectations and positioning ahead of the BoJ meeting are high and stretched. It means that we - everything equal - should expect strong JPY support if BoJ contrary to our view does not live up to market expectations. Scandi Daily Denmark. A lot of focus on EUR/DKK. The cross is now trading above the central parity and at a level where we should expect intervention from the Danish central bank to support the krone. Hence, an independent Danish rate hike has everything equal moved closer, though it has to be underlined that outflow out of DKK so far has been modest. In December intervention by the central bank was just DKK2.6bn, well below the DKK15 to 20bn that normally would trigger a Danish rate hike. That said, EUR/DKK is now trading at a higher level and given the move higher in EONIA rates and the normalisation in financial markets, e.g. the weaker Swiss franc and less euro-related safe-haven demand, the pressure on DKK will probably continue the next couple of weeks and months. BoJ to weaken JPY further this week Source: Reuters EcoWin US S&P500 future Thu Fri Tue Wed Thu Mon US 10y gov yield Thu Fri Tue Wed Thu Fri Global FX EUR/USD (LHS) USD/JPY (RHS) Thu Fri Tue Wed Thu Mon Scandi FX EUR/SEK (LHS) EUR/NOK (RHS) Thu Fri Tue Wed Fri 2 21 January 2013
3 Key figures and events Source: Bloomberg, Danske Bank Markets 3 21 January 2013
4 Today s market data: 21 January S&P500 Intraday, % DJSTOXX50 Max 0.7 Max 0.7 OM XC Min Min OM XS OSE BX Grey line indicates closing of Danish markets DOW JONES NASDAQ 1 month 3.9% 1 month 1.7% S&P % Year-to-date 4.2% Year-to-date 2.2% NIKKEI (07:30) % EUR/USD Intraday EUR 17:00 07:30 +/ USD : JPY day Max ## GBP month Min ## NOK Year-t-date SEK DKK CRB C R B, R aw PLN JPY day month 1.30 GBP month 7.06 Year-to-date 1.25 CHF Year-t-date 6.19 * The chart plots 07:30-23:00 Fri and 23:00 Sun to 07:30 Mon STOCKS FX & COMMODITIES YIELDS & INTEREST RATES USD-Yields Intraday Spread, P o licy R ate 3M bp 17:00 07:30 +/-, bp 1.91 USD2Y USD10Y USD USD 10Y Max 0.3 Max 1.9 EUR USD 30Y Min 0.2 Min GBP JPY 10Y DKK SEK :30(-1)* 17:00 +/-, bp Eurostoxx Intraday, % Grey line indicates opening of US markets NOK DEM 10Y PLN DKK 10Y /- +/- SEK 10Y USD2Y (lhs) USD10Y (rhs) NOK 10Y PLN 10Y * The chart plots 07:30-23:00 Fri and 23:00 Sun to 07:30 Mon * As of closing previous trading day :30 Close Close Go ld, $ 1M future % -0.1% 0.3% 0.4% % 0.3% Oil, B rent, $ Industrials Y Yield Spread to Germany USDJPYGBPFRF ITL DKKSEKNOKPLN US Yield Curve ## M ax ## M ax ### 0.8 ## M in ## M in ### USD2Y USD5Y USD10Y D-t-D +/-, bp (right axis) 07:30 (left axis) 1 month ago (left axis) German Yield Curve DEM2Y DEM5YR DEM10Y D-t-D +/-, bp (right axis) 07:30 (left axis) 1 month ago (left axis) C redit spread, it raxx s. 11* 07:30 1 day 1 month Non-finan Credit spreads * Ask price ** Ask price Swap Spread, bp** 17:00 07:30 USD 17:00 07:30 +/- +/- USD 10Y Europe (IG) JPY 10Y 2 HiVol Xover (N-IG) :30(-1)* 17:00 +/ EUR 10Y DKK 10Y Finan. Sr SEK 10Y Jan Mar Apr Jun Jul Sep Oct Dec Finan. Sub NOK 10Y itraxx Europe (IG) (left axis) itraxx Xover (Non IG) (right axis) * As of closing previous trading day 4 21 January 2013
5 Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates Danske Daily is updated on a daily basis. First date of publication Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication January 2013
6 General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission January 2013
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